Putin Leads Assault on Ukraine Favoring EU Over Russian Ties

Russia is mounting a last-ditch
offensive to torpedo Ukraine’s shift toward Europe as President
Vladimir Putin seeks to salvage his dream of a common economic
space in the former Soviet Union.

As Ukraine pursues an accord on European Union integration,
Russia has disrupted regional trade and sent thousands of troops
for war games on the doorstep of the three Baltic nations that
joined the bloc in 2004. The pact is due to be signed next month
in Lithuania, alongside similar deals for Georgia and Moldova.

The agreement would be the latest step in Ukraine’s bid to
break away from its former Soviet master and poses risks for
both sides. For Putin, the move threatens to wreck his dream of
a continent-spanning economic bloc to rival the European Union.
Ukraine is gambling that closer European ties will outweigh the
risk of retribution from Russia, which buys a quarter of its
imports and supplies it with 60 percent of its gas supplies.

Without Ukraine, “it will be difficult to build Putin’s
new Eurasian edifice,” Fredrik Erixon, director of the European
Centre for International Political Economy in Brussels, said by
e-mail. “If Russia can only persuade other countries to join it
with the power of force rather than persuasion, it will be
tremendously difficult to actually achieve something.”

Signing Date

Ukraine, working to overcome a dispute over the fate of
jailed ex-Prime Minister Yulia Tymoshenko, plans to sign an
Association Agreement and free-trade accord with the EU at a
Nov. 28-29 summit in the Lithuanian capital of Vilnius. The pact
has been in the works since 2008 and would prevent the nation
from joining Russia’s customs union, which so far includes
Kazakhstan and Belarus.

Russia opposes the European push and temporarily imposed
more stringent checks on its neighbor’s exports in August after
banning products from chocolate producer Roshen, owned by former
Ukrainian Economy Minister and EU backer Petro Poroshenko, the
previous month on health grounds.

This isn’t the first conflict between the countries.
Ukraine has fallen out with Russia in the post-communist years,
notably over energy supplies in disputes that have twice halted
the flow of gas to European consumers during the winter heating
season.

“The main problem in Ukraine’s relations with Russia has
always been Russia’s use of energy to pressure Ukraine,”
Yanukovych said in a Sept. 23 interview in New York.

Credit Risk

The risk of deteriorating relations with Russia was cited
among the reasons for a cut in Ukraine’s debt rating by Moody’s
Investors Service last month to Caa1, seven steps below
investment grade.

“Restrictions could impair economic growth and foreign-exchange generation,” Moody’s said. “Disagreements with Russia
could also extend to other areas in the economic or the
political sphere, with negative consequences for Ukraine.”

The cost to insure Ukrainian debt against nonpayment for
five years using credit-default swaps rose 176 basis points in
the past month, more than for any other country tracked by
Bloomberg. The spread, which rises along with the amount of risk
perceived by investors, was 1,042 basis points yesterday,
surpassed only by Argentina.

Split Country

Ukraine sells about a quarter of its exports to Russia and
the same amount to the EU, according to the nation’s statistics
office. About half of Ukrainians support joining the customs
union, a September study by the Eurasian Development Bank
showed.

More than 90 percent of the free-trade terms of the
agreement will be applied immediately after Ukraine completes
all internal procedures, according to a statement from the
foreign ministry of Lithuania, which holds the EU’s rotating
presidency. The accord may boost Ukraine’s gross domestic
product by 6 percent and its consumer purchasing power by 11.8
percent, it said in a statement on its website today.

Even as OAO Sberbank (SBER) and VTB Group, Russia’s two biggest
lenders, organized a $750 million loan to Ukraine last month,
Putin warned that closer ties with the EU will have
consequences.

“If we see that the signed document hurts our market, then
we will have to take measures to protect our market,” the
Russian leader said Oct. 8.

‘Who’ll Pay?’

Putin’s administration also raised the specter of a default
as a possible result of EU integration. Signing the accord will
mean stricter customs procedures for goods crossing into Russia,
which will threaten to push Ukraine to a dire outcome, according
to Sergei Glazyev, Putin’s adviser for regional integration.

“Should Ukraine sign the Association Agreement, its trade
balance will deteriorate,” he told a conference in the Black
Sea resort of Yalta last month. “Who’ll pay for Ukraine’s
default, which will be inevitable?”

Russia also held military exercises with about 12,000
troops in the Baltic region in September as Lithuania leads the
charge to bring the ex-communist nations closer to the 28-member
bloc.

Moscow on Oct. 7 banned dairy imports from Lithuania, due
to what it said were safety concerns, sending lower the shares
of AB Rokiskio Suris and AB Pieno Zvaigzdes, the Baltic
country’s two largest dairy producers.

Eurasian Goal

On the flip side, Russia is ready to cut a 30 percent
customs duty on gas exports to Armenia, the Caucasus country’s
government said Oct. 9. Armenia last month scrapped plans for an
EU link, opting instead to join the customs union.

Reeling in Armenia pales compared with the prospect of
losing Ukraine, the second most populous country in the former
Soviet Union with 45 million people and a key to Russia’s
Eurasian union goal. Putin, a former KGB officer, has called the
1991 Soviet collapse the 20th century’s greatest geopolitical
catastrophe.

“We have a great inheritance from the Soviet Union --
infrastructure, industrial specialization, a common language and
cultural and scientific space,” Putin said in 2011. “It’s in
our joint interests to use this resource for our development.”